"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

Trader Dan's Work is NOW AVAILABLE AT WWW.TRADERDAN.NET

Tuesday, February 22, 2011

Thanks to a reader (John C.) who has a knack for ferreting out stories of importance that sometimes seem to miss the financial press here in the US, comes a story dealing with a potential move by Australian mining companies to do away with the US Dollar in their trade dealings with China and transact their business directly in Yuan or Renminbi.

The fact that we are seeing stories such as this appearing with increasing frequency is suggestive that events surrounding the US Dollar' demise could begin accelerating. Things such as this would have been most unlikely were the US Dollar a stable store of value but the Fed's Quantitative Easing policies along with an out-of-control federal government spending binge have now begun to move towards their inevitable conclusion.

More and more nations and businesses are asking themselves why bother with basing contracts and sales agreements in US Dollar related terms which could end up costing them a decent portion of their profits when currency movements are accounted for. Why not just cut out the middle of the transaction involving the currency exchange and conduct the business directly in the native currency of the country with which you are doing business. It saves money and time while eliminating an element of risk which must be considered when attempting to formulate a risk management plan that accounts for currency movements and that therefore must be hedged against.

It was not that long ago that China and Russia inked a deal cutting out the Dollar in trade between both nations. Remember that? It was a big deal but did not really make too many waves here in the US financial press. A couple of years ago China and Argentina agreed to sort of trial run to conduct trade between themselves directly bypassing the US Dollar as well. As China's influence continues to grow in Latin America, we will see more of this sort of thing.

The biggest obstacle to this has been the limited convertibility of the Chinese yuan - outside of China there is not that much one can do with yuan - but that seems to be changing as China is working diligently along this line to increase the importance of its currency in international trade. Hong Kong is where the focus has been to set up an offshore yuan trading hub to facilitate this. My view is that this process will be irreversible and will gain momentum faster than many here in the US appreciate.

John has also reminded me of recent chatter concerning India settling oil purchases with Iran in gold.

What we are seeing here is the beginning of a trend, one which I believe is going to be gaining momentum as we proceed further in this decade.

AUSTRALIAN companies may reap savings of up to 10 per cent on export contracts as they consider a move to settling deals in China's currency as part of a global trend that will see the yuan emerge as a major international currency in the next decade.

Trade in the yuan has exploded in the past 12 months since the Chinese government expanded a trial settlement scheme, with Hong Kong emerging as the international hub for trade in the currency."Trade in RMB (renminbi, as the yuan is also called) gives Chinese exporters more bargaining power as they won't have to be worrying about US dollar currency risks; they do build in margin for the rise in RMB and most of their expenditure domestically is in RMB," ANZ Asia-Pacific chief Alex Thursby said.Next month, Norman Chan, head of Hong Kong's Monetary Authority -- the city's central bank and finance regulator -- will visit Australia to talk up the scheme. Mr Thursby said the de-risking of contracts for Australian miners by settling them in yuan could save them 5-10 per cent after removing a double exchange changeover fee -- yuan to US dollar, US dollar to Australian dollar.

Check out the following story from Reuters on the housing numbers. I don't know about you, but more and more I question the integrity of nearly all of the data we were getting nowadays.

U.S. housing data may have understated extend of collapse-report

WASHINGTON | Tue Feb 22, 2011 12:22am EST

WASHINGTON Feb 21 (Reuters) - A U.S. housing trade association is examining the possibility that the data it releases underestimated the collapse of the housing industry, the Wall Street Journal reported on Monday.

The following daily chart of the emini S&P shows the nearly uninterrupted rise in the S&P that has continued now since November of last year when the Fed announced that it would engage in a second round of Quantitative Easing.

In looking over this chart, I am throwing up an ADX (Directional Movement Indicator) study to analyze the "trendiness" of its rise. Recall from my earlier posts dealing with this indicator (where we used it to look at the weekly silver chart) that a rising ADX line (shown in black) indicates a market in a trend. Very broadly speaking, once the ADX moves above the 30 line, we should be alert for any downturn in the ADX that might indicate whether the trend is losing some strength.

You will note on this chart that since November, when the ADX turned higher and began rising, indicating that the S&P had entered another trending phase, it has continued rising passing through the 30 level until late last month, when the S&P put in a not quite 2% down day and what most technical analysts will describe as an outside reversal pattern. That is a pattern in which one sees a new high for a move followed by a strong move lower throughout the rest of the day that takes out the previous day's low on decent volume. Generally, the more of the lows from previous days back, that the move takes out, the more significant.

You can see on that day the ADX turned down as the market took out the lows of the previous 5 days. However, as has been the case with this market it immediately negated the bearish chart pattern, found buying and went on to blow right through the top of the outside reversal pattern day moving up another 40 points until today's strong downside day.

Back to the ADX however - it has continued to drift lower even as the market has moved higher indicating the loss of upside strength in the trend. Just as it began to flatten out and lean back to the upside and appear to be rising once again, it turned sharply lower after today's big loss. Note also that the successive peaks in the ADX are showing what we call a negative divergence.

Now we turn our attention to the Directional Movement lines, the blue line, +DI or positive directional movement, and the red line -DI, or negative directional movement. Note that since late November, the positive directional movement line has remained above the negative directional movement line , -DI, for the entirety of the move until the present. Even after today, it is still above the -DI. That indicates that this market is one which is still in a bullish posture, despite the interruption of the rise in the ADX. Were the +DI line to fall below the -DI line, while the ADX itself was falling, we could expect to see further selling in this market.

What all of this is telling me is that while the strength of the uptrend in the S&P is losing momentum, the market will still not break down. It continues to hold moving average support on the downside staying above the 50 day moving average even as it dips below the shorter term moving averages.

In attempting to be completely objective in looking at this market from a technical perspective, the conclusion is that while the uptrend continues and is losing strength, the bulls still have control at this point. For that to change and for this market to begin to break down in earnest, we would need to see a combination of several things with this indicator and chart combination.

First - the -DI (red line) would need to begin rising and the +DI (blue line) would need to begin falling and moving BELOW the -DI.

Second - the market would need to fall through the rising 50 day moving average.

Thirdly - the ADX line would have to begin rising while the first two conditions were present indicating the commencement of a downtrending move

Additionally, and perhaps more importantly, we will need to see something change on the weekly chart. Here is one last look at this thing from a weekly perspective using the same indicator and the same moving averages.

Note how the ADX (black line) is beginning to rise while the +DI is above the -DI. That tells us that from a longer term perspective, this market is entering a trending phase to the upside. Note also that the price has not closed the week below the rising 10 week moving average one time since the Fed began QE2.

If you put this longer term chart together with the daily chart you can see why the S&P will not fall apart. Dips are being bought by those whose perspective is longer term. They are counting on the Fed to keep the liquidity spigots open. Even as the strength of the uptrend on the daily chart continues to deteriorate, the weekly chart shows that the trend is still intact. Not until we get a confluence of both the weekly chart and the daily chart speaking with the same voice will we see a sustained breakdown in the S&P.

Meanwhile, we will wait to see how things shape up with this market and see whether or not it will once again reverse course to the upside after a big down day. The level everyone will now be watching will be today's high at 1342.50.

I get the distinct impression from reading the speeches of the various Fed governors that even while they might take further criticism if they were to go down this path, if this stock market looks as if it is going to rollover to the downside, they will present us all with another round of QE this time with a "3" behind it.

Silver is getting caught up in the crosswinds impacting the commodity sector this morning as the hedgies are throwing away risk trades dumping nearly everything in sight with the exception of the energies.

I find it particularly amusing to note that the world is now going to give up eating because of the unrest in Libya and elsewhere around the middle East. That means corn needs to be sold, as does soybeans and wheat since no one is going to eat any longer because they are too busy watching TV for the next news report out of that region. That means bushel after bushel of corn, beans and wheat are now going to pile up on wharves, docks, ports and grain elevators and will undoubtedly rot. Corn priced at $7.00 could not ration demand so let's take it down to $6.80 and see if that will do the trick!

If you cannot understand this "logic", good for you, because you are still sane. End users in the grains are giddy with delight however as they have been hoping that the hedgies would start throwing away grain so that they could obtain coverage.

Gold and Silver are holding well considering the barrage of selling being generated by these mindless algorithms across the commodity complex.

If you have benefitted from some of the articles posted here and would like to express your gratitude to Trader Dan for freely sharing some of the market wisdom he has gained over his long trading career, please feel free to Donate.

About Me

Dan Norcini is a professional off-the-floor commodities trader bringing more than 20 years experience in the markets to provide a trader’s insight and commentary on the day’s price action. His editorial contributions and supporting technical analysis charts cover a broad range of tradable entities including the precious metals and foreign exchange markets as well as the broader commodity world. He is a frequent contributor to both Reuters and Dow Jones as a market analyst for the livestock sector and can be on occasion be found as a source in the Wall Street Journal’s commodities section as well as CBS Marketwatch where his views on the gold market can often be found.
He is also an avid beekeeper.

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